UK General Election adds to the confusion

Theresa May has been in a difficult position on many fronts since assuming leadership of the country somewhat unexpectedly in the wake of the Brexit debacle last year. Not least of her problems is the fact that she was never elected Prime Minister and so her moral authority to rule was not as strong as it might be. This is not a great position to be in as she faces into an incredibly difficult Brexit negotiation process with the EU over the next couple of years.

Her hope is that she will come back to power after June 8th with a significantly stronger majority, which will give her all of the moral authority that she will undoubtedly need as the UK enters totally uncharted waters.

It was always going to be the case that whatever deal she managed to negotiate with the EU would be difficult to sell to the two very divided wings of the Conservative Party. She will need a much stronger majority to navigate what will be an extremely difficult negotiation process with the EU-27. Her hope is obviously that with a stronger majority she will be in a better position to push through a deal that would be in the best interests of the UK. Based on current opinion polls, which show that the Conservative Party has a 20-point lead over Labour, she could well come back with the stronger majority she needs. She currently has a working majority of around 17, and this could come close to 100 if the current opinion polls were to materialise in the actual vote on June 8th. This would give her a much stronger mandate to negotiate with the EU, but it would not make the process any easier because the EU-27 basically holds all of the trump cards and the UK holds few if any.

Despite her assertion when Article 50 was invoked on March 29th, the Prime Minister clearly accepts that it will be impossible to negotiate a Brexit deal within the two-year timeframe set out in Article 50. Based on her current working majority, an admission that a longer timeframe would be required with some sort of transitional arrangement between the UK and the EU, would be very difficult to sell. She clearly now believes that if she comes back with a strong majority, she will then be in a position to admit that the two-year timeframe is not realistic. The UK would then likely enter into a transitional arrangement with the EU at the end of the two-year period. During that transitional phase, the UK would most likely have access to the EU market and continue to adhere to its rules, particularly in relation to the free movement of people, and make financial contributions, without having any influence over EU policy. In other words, the UK would have all of the responsibilities inherent in EU membership without having any of the rights. This period could last for five years or longer. This is not exactly what those who voted for Brexit envisaged.

The early election most definitely does not suggest that a second referendum would be held. The Liberal Democrats will likely fight the General Election on that basis, but given that the party currently holds just 9 seats in the Parliament, this possibility is not likely to gain any traction.

For the Prime Minister, the calling of an election makes perfect sense, particularly with the unelectable Jeremy Corbyn leading the Labour Party. She needs a stronger majority to negotiate on behalf of the UK; the economy is still doing well; and the opinion polls are very much in her favour. If the Labour party has a poor election, it would most likely spell the end of Jeremy Corbyn and a new and more sensible Labour Party leader could emerge. This would in turn introduce a new political dynamic to the whole Brexit negotiation process.

Meanwhile, sterling is not remotely concerned by any of the latest political developments, but the truth is that the markets are confused about what it all really means. There is a view that the election increases the chances of a hard Brexit and a contrary view that it increases the chances of a soft Brexit.

In other words, nobody has a clue. It all gets ‘curiouser and curiouser’.

Jim Power

The views and opinions expressed in this article are those of the author.